(PA Graphics)
(Picture: PA Graphics)Inflation is back with a bang, squeezing the spending power of everyone in the UK as a range of everyday costs from grocery bills to fuel rise fast, constraining the economy.
Forecasts for when and where it will peak are a hot topic, making economic analysis a talking point in London’s cafes and pubs just as much as Westminster offices City trading floors. Commentators agree the worst is yet to come into the autumn and winter, when demand for energy rises as the winter weather kicks in.
Citibank’s prediction that the main measure of inflation would peak at 18% in January has caught the nation’s attention. That would take the rise in the consumer price index significantly past official Bank of England estimates of 13% over the next few months. Citi expects the Retail Price Index, which unlike CPI takes into account housing costs, to head even higher, reaching 21%.
Both rises would take inflation higher than the 17.8% it reached in 1979 during the oil shock when global crude production fell after the Iranian revolution and into the Iran-Iraq war.
Now, it’s Russia’s invasion of Ukraine that’s sending energy prices rocketing higher. And with energy and transport costs affecting the price of more or less everything in the economy, there is no escape from the extent of the impact.
The price of gas has doubled since May and today wholesale prices hit a new peak for 2022, passing above levels touched when Moscow’s tanks were first rolling toward Kyiv. Ofgem is faced with that unwelcome milestone as it prepares to announce the UK’snew energy price cap on Friday. Citi predicts the cap will go up to £3717 from the current £1971 for Direct Debit customers, with what it called “substantially greater” increases likely to follow in January and April.
Citi’s analysis also takes into account likely measures to reduce bills, including a suspension of the green energy levy and reduced VAT on household bills.
It all adds up to a likelihood of sustained interest rate rises from the Bank of England, even as the economy slows, in order to try and tame rising prices. Policymakers lifted rates by 0.50% to 1.75% at their last meeting and could have much further to go if price rises from increased production and transport costs are passed throughout the economy.
“Should signs of more embedded inflation emerge, we think Bank Rate of 6-7% will be required to bring inflation dynamics under control,” said Citi’s chief UK economist, Benjamin Nabarro, who also described the evidence so for for embedded inflation as “limited”.
Recent comment from Dutch bank ING said the impact of higher energy prices on inflation could “gradually dissipate” from around February, and commodities markets could actually edge lower from “mid-2023”, meaning inflation could fall back toward the Bank of England’s 2% target by 2024.
